With the subprime debacle and housing market meltdown morphing into the current credit crisis, business owners are wondering what lies ahead in the first quarter of '09. Chief among the concerns is credit availability. To find out, we contacted some top financial experts to share their thoughts on how to manage cash and liquidity given the state of current credit markets. Here are some tips on surviving in today's volatile credit market conditions.
First, the Analysis: How Bad Is It?
Currently, the credit market is "very, very tough," said Victor Maruri, CEO of Hispania Capital Partners, a private equity firm based in Chicago. Hispania Capital focuses on "Hispanic-owned businesses or businesses that provide goods and services to the Hispanic community," and currently has about $225 million under management.
"We are liquid," said Mr. Maruri, "but we have seen instances of banks arbitrarily reducing working capital." He said this could have a severe impact on daily operations.
Marcos Rodriguez, a managing partner at Palladium Equity Partners, offered a more dire assessment. "Today," he said, "we are facing a major recession and credit markets have all but ceased to function." Sounding slightly more optimistic, Roberto Medrano co-founder and executive vice-president of SOA Software, said that with the governmental infusion of funds to banks "not only from the United States but also world banks, the credit crunch is easing."
Financial Advice: 'Stay in Touch With Your Bank'
In the face of a tight credit crunch, the first thing to do, Mr. Maruri says, is secure one's cash flow and liquidity. "Cash is king," he said. "Be very proactive with your banks. ... Talk to your bank and make sure everything is fine."
Hispania Capital currently owns four companies, including an engineering firm based in Miami, a restaurant chain in South Florida, a tech business in Massachusetts, and a marketing analysis group based in Philadelphia. "Our companies are fine in the sense that we've got our working capital lines," Mr. Maruri said. "But you have to be very, very careful and really be in touch with your banks at all times."
If you are not currently using some of the lines of credit available from your bank, he recommends taking them down and turning them into cash to be deposited into the bank account. In the looming recession and credit crisis, a great deal depends upon a company's cash flow. Cash management becomes paramount.
Palladium typically provides advice to its management teams about the best practices for strategy, finance and operations. Currently, it recommends that companies take steps to ensure liquidity. These include: "manage accounts receivables closely; focus on collections; stay informed of customer financial viability; revise cash forecasts; examine inventory and raw material buying patterns; understand exposure to key suppliers, negotiate more favorable terms, and identify alternate sources of supply," Mr. Rodriguez said.
Where to Find Capital
Beyond conserving one's liquidity and tending to one's cash flow, where can capital be obtained? The standard sources for new capital are bank loans, equipment loans, and investors.
However, the Small Business Administration reports many small businesses take a riskier route. "Many use personal credit or home equity loans for business purposes," the SBA reports. Even these sources of company financing are drying up in the current economy. "Three years ago companies often relied on home equity loans. Today, with home prices dropping, those aren't available," said Richard Orozco, a partner in Benchmark Financial Groups of Aliso Viejo, California. "It's tough to find capital. Banks just aren't loaning. When they are, they make it extremely difficult."
As a consequence, long-term growth plans are being reviewed and in many instances revised. Investors, such as Hispania Capital, who premise their investments on a dynamic program of acquisition and leveraging growth are retrenching or at least remapping their plans.
"We are still opening restaurants, but we are finding it more difficult to obtain financing for expansion," Mr. Maruri said. "Frankly, it's not as if we are going to be very aggressive on expansion in the next year because we do believe we are entering a severe recessionary environment." One solution for tight credit, he suggests, is broadening the number of banks with which you talk, including specialized banks.
At the moment, the best loan financing one can obtain is asset-backed. If you have equipment, inventory, accounts receivable, those offer the best opportunities for loans. Mr. Maruri explains that banks are most likely to loan in such circumstances because collateral has "the lowest possible impact on the bank's capital adequacy ratios."
Beyond the Banks
An alternative to bank loans is equipment lease loans, which is where Mr. Orozco's firm Benchmark Financial Groups enters the picture. His firm is a "diversified financial services company that provides creative leasing and financing programs." Benchmark borrows money from traditional lenders at a wholesale rate and lends it to small businesses. In particular, the firm, like others, provides loans for equipment purchases, such as computers, construction machinery, office equipment, and so on. The collateral is built into the loan in the form of the equipment. Mr. Orozco advises getting several quotes from different leasing companies.
In contrast to bank loans, Mr. Maruri and others say private equity capital is still plentiful. "The cash is still out there. It's just not in the commercial banks. The cash is now with funds, private equity funds or hedge funds. The private equity world still has a significant amount of under-utilized funds out there."
Mr. Rodriguez agrees. As evidence, he points to his own firm, Palladium, which "continues to focus investments on companies well-positioned to capitalize on the growing Hispanic market. With almost $500 million available to invest from our latest $775 million Fund III," said Mr. Rodriguez, "we are enthusiastic about investing debt and equity with Hispanics-owned companies."
Venture capital, too, is available, says Alicia Morga head of the start up Consorte Media and a former venture capitalist herself. Venture capitalists, Ms. Morga said, "know that it's in down cycles that you find some of the great businesses."
Despite the looming recession, the essentials of investing from a venture capitalist perspective have not changed, she says. The fundamental questions are still "what's the team, what's the market, how are they going to make money, what's the business model, what's the technology? Basically, investors are looking at all of those things and making a bet on them and trying to limit their risk in each one of those categories."
No one can deny that the current credit market is tough. It poses significant obstacles for any entrepreneur seeking to maintain and expand their business. Still, opportunities for gaining working capital exist, especially if your company rests on a solid business foundation and maintains its profitability.
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